2.6.3 - Supply-side policies

• Supply-side policies aim to improve the long run productive potential of the economy.
• Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used.
• Interventionist policies rely on the government intervening in the market.
• Supply-side policies

  • Market - based
  • Interventionist approach
• Market-based policies:

  • To increase incentives
  • To promote competition
  • To reform the labour market
• Market-based policies: To increase incentives

  • Reducing income and corporation tax to encourage spending and investment.
  • Reducing benefits to increase the opportunity cost of being out of work
• Market-based policies: To promote competition

  • By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency
• Market-based policies: To reform the labour market

  • Reducing the NMW (or abolishing it altogether) will allow free market forces to allocate wages and the labour market should clears.
  • Reducing trade union power makes employing workers less restrictive and it increases the mobility of labour. This makes the labour market more efficient.
• Interventionist policies:

  • To promote competition
  • To reform the labour market
  • To improve skills and quality of the labour force
  • To improve infrastructure
• Interventionist policies - To increase incentives

  • Reducing income and corporation tax to encourage spending and investment.
  • Reducing benefits to increase the opportunity cost of being out of work
• Interventionist policies - To promote competition

  • A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete, too.
• Interventionist policies - To reform the labour market

  • Governments could try and improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information.
• Interventionist policies - To improve skills and quality of the labour force

  • The government could subsidise training. This also lowers costs for firms, since they will have to train fewer workers.
  • They may spend more on education, such as university, so workers will be more skilled and efficient.
  • This may help to reduce occupational immobility
• Interventionist policies - To improve infrastructure

  • Governments could spend more on infrastructure, such as improving roads and schools.
• Weaknesses of supply-side policies:

  • There are significant time lags associated with supply-side policies and not all policies will be successful.
  • If there is a lot of spare capacity in the economy, then supply side policies will have no impact. On the Keynesian curve, if the economy is producing on the elastic part of the curve, there will be no change in output following the policy.
• Strengths of supply-side policies:

  • Supply-side policies are the only policies which can deal with structural unemployment, because the labour market can be directly improved with education and training